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China's 12Th Year Plan: The Coming Storm On Wages

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http://www.chinalawblog.com/2010/11/chinas_12th_year_plan_the_coming_storm_on_wages.html

The 5th Plenum of the 17th CCP Central Committee completed its meeting in Beijing on October 18. David Shambaugh wrote a good review of the meeting for the Brookings Institute on November 2 (here). Aside from the political issues discussed by Shambaugh, the major task of the plenum was to adopt the outline for the 12th Five Year Plan that will guide China's economic development of China from 2011 to 2015.

The plenum approved the outline for the plan, entitled The Communist Party of China (CPC) Central Committee's Proposal on Formulating the Twelfth Five-year Program (2011-2015) on National Economic and Social Development. The Chinese version of that document was published on October 27. The formal plan will be drafted on the basis of the Proposal and will be submitted for approval at the next meeting of the National People’s Congress, scheduled for March 2011. One wonders what China will do in the first quarter of 2011 when there is no formal plan in effect. I am reviewing the Proposal and will publish some reports on its contents shortly.

Though there has been much speculation and discussion in the foreign press regarding the probable contents of the 12th Plan, I have been looking more at the the concerns of the local Chinese. In preparing for my review of the Proposal, my research assistant and I gathered several hundred pages of local Chinese language internet news reports on the 12th Five Year Plan. I was surprised to find that over 80% of the concerns were about a single issue: income disparity. The following concerns were constantly expressed:

* There is a growing disparity between the highest income earners and the lowest income earners (the GINI coefficient).

* There is a growing disparity between the incomes of urban residents and rural residents.

* There is a growing disparity between the incomes of residents of the coastal provinces and the residents of the rest of Western, Central and Northeast China.

These are common complaints of “uneven development” that have been the subject of concern in China for some time. We also saw the following new, more troubling, concerns consistently expressed:

* The percentage increase in the wages of Chinese citizens has not grown as fast as the percentage increase in China's overall GDP.

* Though China has a high savings rate, the percentage increase in the savings of Chinese citizens has not increased at the same rate as the percentage increase in the Consumer Price Index. This means that even though the Chinese save, they are actually falling behind in terms of wealth accumulation.

Overall, the feeling is that "if China is now the second largest economy in the world, why don’t we feel better off?" The underlying theme is that "clearly China has made a lot of money over the past 10 years, but where did all that money go?" It certainly did not go into the pockets of the Chinese urban factory and service workers and it certainly did not go into the pockets of the Chinese farmers.

This theme is the basis for the new book by Lang Xianping 郎咸平 (Larry H.P Lang), a distinguished Hong Kong University Chinese economist. Lang’s new book, published in September, is entitled “Why Is Our Life So Hard? Why Is Our Income So Low? Why Are Our Prices so High? Why Do Our Businesses Struggle So Hard?” (我们的日子为什么这么难) (He apparently likes long titles). This book has only been out for a month and is already the number 2 best seller in Qingdao. This shows how its theme resonates with the local public. Professor Lang also has a blog (in Chinese) here.

In the first chapter of the book, Lang points out the strangeness of wage structure with the following key numbers:

* In 2009, China's domestic consumption as a percent of GDP was 29%. No modern country has ever achieved such a low number. The number for the U.S. is about 70%. Even the number for Africa is about 50%.

* The percentage of wages in China as a portion of GDP is 8%. This number is so low that it really cannot be understood. The number in the U.S. is 58%. The number in Mexico is 33%. The number in the Philippines is 27%. In most of Africa, the number is 20%.

* China has the lowest average wage in the industrial world at $.80 per hour, with the highest number of hours worked at 2,200 per year. Compare this to Brazil, for example, where the average hourly wage is $2.25 and the average hours worked per year is 1,841.

Given this data it is no surprise the average Chinese worker feels left out of China's economic miracle. That is, the “economic miracle” was created by sacrificing the Chinese wage earner. Lang’s point, stated more forcefully, is that these numbers show there has been no Chinese miracle for the average Chinese.

I will leave the obvious social and political implications to others and just examine what this all means for foreign businesses in or involved with China.

Clearly, the pressure is enormous in China for an upward push in wages in every segment of the economy. This means that for foreign businesses outsourcing product in China, making product in China and operating service businesses in China the party is over. All companies operating in China will see sharp increases in wages over the next five years. This trend simply cannot be avoided. This sharp increase in Chinese wages will then have a knock on effect, pulling up wages in places like Vietnam and Cambodia that look to China for a lead in manufacturing wages and costs. This is the future. Get ready for it.

Professor Lang answers the "why" question he poses in his book's title by asserting it is all a European/American imperialist plot explicitly designed to exploit China on an imperialist model. This answer is why he is permitted to publish his gloomy books: all of China’s many problems can be attributed to foreign plots. Lang is an interesting character: a Wharton School PhD who is an avowed student of Lenin’s views of Western imperialism. He is by far the most popular economics writer in China today and must be taken seriously. Though I question his mono-causal analysis, I agree with much of what he says in this and other books about the structure of the Chinese economy.

China's wage storm is coming.

What do you think?

Not sure that it follows wages would go up in Cambodia and Vietnam, surely they would want to push their competitive advantage?

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If China thought it was losing too much business because Cambodia or Vietnam were undercutting it, what would it do about that?

I think that the point is China needs to rebalance internally, not engage in export driven races to the bottom. China has manufacturing excess capacity. A boom in Vietnam and Cambodia could be useful for them, in being a source of cheap imports.

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If China thought it was losing too much business because Cambodia or Vietnam were undercutting it, what would it do about that?

Surely Cambodia need an infrastructure before its deemed competitive.

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I think that the point is China needs to rebalance internally, not engage in export driven races to the bottom. China has manufacturing excess capacity. A boom in Vietnam and Cambodia could be useful for them, in being a source of cheap imports.

You mean cheap imports into China? I can see that.

So how much do you think China would allow Vietnam to export to other countries?

Currently it exports to 200 countries, 28 of them with an annual import turnover of over $100mil, 16 over $500mil and 7 over $1bil (US, Japan, China, Australia, Singapore, Germany, Malaysia and the UK).

The estimate for Cambodia's exports in 2009 was $4.13 billion.

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Clearly, the pressure is enormous in China for an upward push in wages in every segment of the economy. This means that for foreign businesses outsourcing product in China, making product in China and operating service businesses in China the party is over.

Good. Perhaps we can now start to see the trend for 'onshoring' as jobs move back to the west. Thanks for all the (shite) toasters!

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Good. Perhaps we can now start to see the trend for 'onshoring' as jobs move back to the west. Thanks for all the (shite) toasters!

I doubt it, the UK is still spraying roundup over UK private sector businesses, for instance just my failed chippy (which is quite funny actually because the person who was going to buy it pulled out and its been closed for so long it has turned into a turd!) anyway for this chippy I needed to fork out 30K before I'd even made a penny.... Then with a suitable turnover of about £150K I'd have to fork out 20% of that in VAT then another 28% in tax....

UK is far too hostile for businesses.

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It certainly looks like the chinese worker is being screwed hard by their govt.

Rising wages can only be a good thing, they will buy more of our stuff, their standard of living will rise even more etc etc.

There may be a civil war unless the chinese govt is very careful though.

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I've said it before and I'll say it again. China will boil over with inflation - same as India.

Wages will double (at least!) in dollar terms - maybe quadruple - but prices will rise faster.

It'll be a lot of fun to be in China in the next 10 years. Or not, depending on how you look at things. If you have a lot of mortage debt, it'll be a Godsend.

Edited by AvidFan

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So they ask the question what's happened to all the money? I thought China got the jobs because they undercut the west by paying low wages, clearly only the bosses where going to profit. Increase wages and the jobs will move back to the home nation or to another low wage economy.

More political posturing I think.

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I've said it before and I'll say it again. China will boil over with inflation - same as India.

Wages will double (at least!) in dollar terms - maybe quadruple - but prices will rise faster.

It'll be a lot of fun to be in China in the next 10 years. Or not, depending on how you look at things. If you have a lot of mortage debt, it'll be a Godsend.

And right on cue:

http://imarketnews.com/?q=node/21837

Update: China PBOC Offl, Advisors Call For Mon Policy Shift

BEIJING (MNI) - A People's Bank of China official and two advisors to the central bank called Thursday for a shift away from the current "appropriately loose" monetary policy as growth stabilizes and amid rising concerns about inflation.

Central bank research department director Zhang Jianhua and Beijing-based economists Xia Bin and Li Daokui all seperately told a conference here that the time has come to abandon the stance formally adopted by the State Council at the height of the global financial crisis in November 2008.

"Given current conditions, it's necessary to make adjustments to the direction of our monetary policy direction, towards a prudent monetary policy," Zhang said.

"The abnormal policies of abnormal times have done their job."

Chinese consumer price inflation is on the rise, Zhang argued, while there will be "no problem" of hitting 10% GDP growth this year.

"We shouldn't let interest rates be negative for the long-term and erode people's wealth," he said.

The PBOC raised benchmark interest rates on October 20, the first hike in nearly three years, though Zhang appeared to play down market speculation that the adjustment marked the first of several.

"Someone asked me if, by raising rates, China is in a long-term rate hike cycle and I said this is a misunderstanding of monetary policy

direction," he said.

"We're now focusing on countercyclical monetary operations."

Li earlier said that growth appears to be stabilizing in the 9% to 10% range and that "we need to think about shifting monetary policy and turning to a prudent or even cautious policy from the current appropriately loose one when conditions are ready."

That same argument was made by Xia Bin, who is an economist at the Development Research Center, a State Council think tank. Both Li and Xia are academic members of the Monetary Policy Committee under the PBOC.

Xia and Zhang both reiterated government concerns about the Federal Reserve's quantitative easing program, arguing that it will lead to a flood of inflows that will inflate domestic asset prices.

Li told reporters on the sidelines of the conference that quantitative easing will add to appreciation pressure on the yuan.

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